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Rethinking Prices

The changing architecture of demand response in America.

Fortnightly Magazine - January 2010

awards totaling $3.4 billion to stimulate the development of the smart grid. 3 The awards, chosen from a list of some 400 proposals, encompass a variety of projects. But, in a break from past federal government awards, which have tended to be exclusively technology-focused, the awards also feature innovative rate design practices, such as dynamic pricing, that would promote the acceptance of DR by customers.

In these awards, DOE allocated $1 billion to empowering consumers to save energy and cut utility bills. The DOE announcement noted, “These investments will create the infrastructure and expand access to smart meters and customer systems so that consumers will be able to access dynamic pricing information and have the ability to save money by programming smart appliances and equipment to run when rates are lowest. This will help reduce energy bills for everyone by helping drive down ‘peak demand’ and limiting the need for ‘stand-by’ power plants—the most expensive power generation there is.”  4

As dynamic pricing practices gain favor with customers, they likely will receive active consideration from the state regulators who would ultimately have to approve their deployment.

One could argue that the Obama administration has brought dynamic pricing to a tipping point by making it a key element of the smart-grid stimulus package. But other factors are working in the same direction.

Dynamic pricing is receiving active consideration by independent system operators (ISOs) and regional transmission organizations (RTOs). The theme of the third DR symposium organized by the PJM Interconnection in Baltimore in November 2009 was price-responsive demand, which involves bidding negatively sloping demand curves into the wholesale market. 5 Currently, PJM with a peak demand of some 140,000 MW, has about 7,000 MW of DR resources in place. Almost all of these rely on traditional program designs and involve bidding so-called “negawatts” into the wholesale market. PJM is hoping that price responsive demand will put “demand-side resources back on the demand side of the equation.”

Terry Boston, PJM’s president and CEO, issued a statement saying that PJM’s long-term vision was price responsive demand, since it allows customers to respond directly to market prices. He sought out the assistance of state regulators to:

[T]ake advantage of price responsive demand capabilities through their own retail rate structure. To grow demand response and establish its participation as an enduring feature of PJM markets, our region needs innovative retail rates that are linked to wholesale prices. PJM’s market is well-suited to facilitate such demand participation because it already provides transparent price information at each location that is consistent with grid reliability requirements. PJM will embark on a program to encourage individual States to promptly design their own dynamic rate structure—in whatever way that best serves their own State. PJM is willing and able to support various retail rate structures with tools and systems that enable customer response to real-time wholesale prices and recognize demand response capabilities in reliable grid operations, transmission planning and capacity adequacy planning. 6

The idea of introducing price elasticity into retail markets also is gaining currency at ISO New England and the